For many homeowners, real property plays two very important roles: the family home and the family’s largest asset. So, it’s no surprise that most people who own homes and are considering bankruptcy have questions about how filing bankruptcy will impact home ownership. The answer to that question depends on a variety of factors, including:
- The amount of equity in the home
- Whether the mortgage is up to date or in default, and
- Whether the homeowner files for Chapter 7 or Chapter 13 bankruptcy
Chapter 7 Bankruptcy and Home Ownership in Tennessee
In Tennessee, a homeowner who files for Chapter 7 bankruptcy may exempt a certain amount of equity in the home. In simple terms, that means that the exempt amount of equity is off limits when the bankruptcy trustee looks for assets that may be available to pay creditors. The amount of the Tennessee homestead exemption varies depending on certain characteristics of the bankruptcy filer.
Tennessee Homestead Exemptions
The homestead exemption does not apply to all real property, or even to all houses a bankruptcy petitioner may own. Rather, the homestead exemption specifically protects a home the petitioner (and, in some cases, his or her spouse or dependent) uses as his or her principal place of residence.
The exempt amounts in Tennessee are:
Basic homestead exemption for an individual without special classification: $5,000
Exemption for a married couple owning the home jointly: $7,500
Exemption for an individual aged 62 or older: $12,500
Exemption for a married couple one of whom is 62 or older: $20,000
Exemption for a married couple both of whom are 62 or older: $25,000
Exemption for individual with custody of a minor child: $25,000
Exemption for married couple filing jointly with custody of a minor child: $50,000
Determining the amount of equity in the home and whether or not the full equity is exempt is a deciding factor for many people considering Chapter 7 bankruptcy. If there is significant non-exempt equity in the home, the bankruptcy trustee may sell the home to distribute the excess value to creditors.
For many Tennessee homeowners, this isn’t an obstacle. In the last quarter of 2018, 12.88% of Knoxville mortgages were seriously underwater, meaning that the amount owed on the home was significantly more than the value of the home. In other areas of Tennessee, the problem is even more serious. For instance, in one Memphis zip code, more than 60% of mortgages were seriously underwater. These homeowners, and those with positive equity below the exemption threshold, can typically keep their homes in bankruptcy–assuming that they are able to continue making mortgage payments in a timely manner. However, most people with significant non-exempt equity who want to keep their homes do not opt for Chapter 7.
Chapter 7 Typically Won’t Help Keep Your Home
While it’s possible for many people with no equity or only exempt equity to file for Chapter 7 bankruptcy and keep their homes, Chapter 7 typically doesn’t provide much help in keeping a home if the mortgage is in default or the home is in foreclosure. The automatic stay, which immediately halts most collection action in most consumer bankruptcy cases, can sometimes give the homeowner a small amount of additional time to address past-due mortgage debt. And, discharging other debt, such as medical bills and personal loans, may make it easier to pay the mortgage moving forward. However, you cannot keep your home in a chapter 7 bankruptcy if you do not keep making the normal mortgage payment or if you are behind, so Chapter 7 typically doesn’t provide a direct route to saving a home when the mortgage is in arrears.
Chapter 13 Bankruptcy and Home Ownership in Tennessee
Chapter 13 bankruptcy is very different from Chapter 7. While Chapter 7 offers a relatively quick means of eliminating many types of unsecured debt, it is not designed to help bankruptcy filers manage secured debt like car loans and mortgage loans. Chapter 13, on the other hand, offers a way for people who have fallen behind on secured debts to catch up through regular monthly payments, rather than all at once.
In a Chapter 13 case, the bankruptcy petitioner keeps all of his property, unless he decides to surrender certain property to eliminate the associated debt. That makes Chapter 13 a more popular option among homeowners who have non-exempt equity and want to keep their homes.
The prospect of losing your home is very scary and upsetting. A chapter 13 reorganization plan is a wonderful way to catch up your mortgage payments over time, stop a foreclosure proceeding and save your home.” – Bond & Botes attorney Cynthia T. Lawson
The ability to repay past-due amounts over time is also appealing for many people who have fallen behind on mortgage payments or are facing foreclosure and can’t catch up fast enough to protect their homes. For example, a homeowner who faced a period of unemployment and fell behind on the mortgage may have returned to work and be making regular monthly payments again, but unable to pay the lump-sum necessary to cover the past-due amounts. In that situation, the mortgage lender may be unwilling to make longer-term payment arrangements to avoid foreclosure. And, the situation may be aggravated by continuing late charges and other fees.
In a successful Chapter 13 bankruptcy case, the lender can be forced to accept smaller payments toward the past-due amount, and may be prohibited from continuing to add late fees and other charges based on the past-due balance.
How Chapter 13 Bankruptcy Works
In most Chapter 13 bankruptcy cases, an automatic stay is entered immediately upon filing, just as in a Chapter 7 case. The automatic stay prevents creditors, including mortgage lenders, from taking any further collection action while it is in effect. The bankruptcy petitioner and his or her attorney then use that breathing room to create a proposed three to five year repayment plan.
The bankruptcy trustee assesses the plan to ensure that it is fair to creditors and realistic for the bankruptcy petitioner and then makes a recommendation to the bankruptcy court. If the plan is confirmed, the bankruptcy filer continues to pay current obligations, including current mortgage loan debt, as it comes due. At the same time, he or she makes a regular monthly payment to the bankruptcy trustee, which is broken up and distributed to creditors to pay toward past-due balances included in the plan.
Keeping Your House in a Tennessee Bankruptcy in a Nutshell
Chapter 7 bankruptcy generally doesn’t provide any significant assistance in saving a Tennessee home if the mortgage is in default or the homeowner is facing foreclosure. However, if mortgage payments are current or can be readily caught up, Chapter 7 is not an obstacle to keeping the family home as long as the equity in the home doesn’t exceed the applicable homestead exemption.
In some cases, Chapter 13 bankruptcy provides a means of stopping foreclosure and catching up on past-due mortgage payments over time.
To learn whether bankruptcy may be the right solution for you and how a Chapter 7 or Chapter 13 case might impact your home, schedule a free consultation right now. Just call 877-581-3396 or fill out the contact form on this page to get started.
Cynthia T. Lawson is the Managing Partner of the Bond & Botes Law Offices location in Knoxville, Tennessee. She holds a Bachelor of Science from East Tennessee State University, and a Juris Doctorate from University of Memphis, Cecil C. Humphreys School of Law. She currently serves as a Mentor for the Moment in bankruptcy.Read her full bio here.